Valley VCs Sit on Cash, Forcing Startups to Dial Back Ambition

It&#x27;s really weird how this article tries to frame the situation. It&#x27;s almost like the startups feel entitled to the funding.<p>The point of funding should really be to enable faster growth than they might otherwise have been able to achieve, but if a business can&#x27;t at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place?

I&#x27;ve been in tech only 6 years and I am already bored of these cycles of VCs becoming frenetically exuberant followed by cautious times. Their advice to startups changes depending on what time it is. It&#x27;s all so predictable yet people are surprised every time. Any entrepreneur building a business factors these in and approaches fund raising based on that knowledge. I don&#x27;t even know the point of these articles any more.

In other news, &quot;Suits Make a Comeback!&quot;[0].<p>Investors can&#x27;t just sit on money. They have to get returns, and that means that they have to put capital to work.<p>[0] <a href="http:&#x2F;&#x2F;www.paulgraham.com&#x2F;submarine.html" rel="nofollow">http:&#x2F;&#x2F;www.paulgraham.com&#x2F;submarine.html</a>

&gt; Valley VCs Sit on Cash, Forcing Startups to Dial Back Bullshit<p>FTFY

In theory this won&#x27;t affect the decision making process of top-tier VCs. A good invesment is a good investment regardless of the prevailing funding climate.<p>In practice, I&#x27;m guessing if the LPs get cold feet, then VCs will be forced to triage their funding decisions accordingly. How much this matters given the sheer size of some funds, I&#x27;m not sure.

The Mike Volpi quote is curious:<p>“Right now, we don’t really know what things are worth...When you don’t know what something’s worth, you don’t know whether you are getting a good deal or a bad deal, so the obvious thing to do is, not much.”<p>When you invest in startups (with the exception of late-stage, pre-IPO investing) you never really know what things are worth. The business model of VCs is to make a bunch of high-risk bets, most of which will fail, in order to get a couple of big winners. What&#x27;s really happening is that VCs aren&#x27;t willing to invest at valuations that companies expect based on recent history. This is similar to housing bust, when home owners refused to sell because they continued to believe that their homes were worth what they were before the financial crisis.

Wait, what? VCs&#x27; valuation of <i>their</i> money exceeds their faith in your &quot;unicorn&quot; startup idea? Ohhhhhh nooooooooooo

If we look at this from a risk-reward perspective and define 10 as the maximum reward for the maximum amount of risk then we have the entrepreneur who is a 10 for obvious reasons, an Angel who invests in the entrepreneur (maybe not the idea really because it might pivot a few times) maybe at an 8, then VCs at 7, bigger institutional investors at 5, and so on and so forth until the average teacher in Michigan who&#x27;s pension allocates .001% of AUMs to VC at maybe .5 it becomes clear that if that structure becomes unbalanced the overall value creation cycle starts to become disfigured. In other words everyone tends to forget what&#x27;s really important. For example if an entrepreneur doesn&#x27;t feel that there is a great deal of risk to their personal livelihood as well as a great deal of reward for taking that risk and an inherent difficulty of having to earn every single cent (i.e. if they assume they can find easy money) then they are probably less likely to dig as deep as they can to come up with ingenious solutions to problems which is really the core of the whole tech startup scene. And then we can back trace that all the way back to the teacher in Michigan who might think that they are better off giving their money directly to someone who is a &quot;VC&quot; in SV. Basically the whole risk-reward equation becomes unbalanced. As a result when S#$$ hits the fan for them, everyone who doesn&#x27;t really understand that model&#x2F;equation will slow down. But my theory is that the ones that actually stick to the fundamental rules will keep plugging along with a small grin on their faces because they are glad that they are the ones who actually start to lead again and create value with a lot less BS!

Or they could diversify and invest in more projects with smaller sums, couldn&#x27;t they? Would probably require more people to manage the increase of investments.

Investors market. Tighter conditions, preferences, ratchets.

It seems like these VC cycles are akin to a natural selection process for startups. Those with legitimate market fit and pricing schemes will have the highest fitness and thus survive; new startups will (hopefully although historically not so much) attempt to copy a similarly sustainable architecture. So in essence these cycles are beneficial to startup market health

I think it is interesting that this article is critical of valuations changing over such large time spans when the public stock market often marks up and down stocks by a significant amount on a daily basis.

&gt;For most firms this is a pause, a reset —not a meltdown<p>Well, isn&#x27;t that just a nicer way to put this?

Their service here in Washington, D.C. is awful. I used to love Uber, evangelized it to friends, was even the first to show Sanju Bansal how it worked when we were at a gala. Everyone else was fumbling for their S-Class keys while our twin black Navigator vehicles proceeded to pick us up at the entrance. That, to me, was the Zenith of Uber. The entire VC set of the city was waiting for cars and drivers gridlocked in the garage and lot, while some kid with an app summoned two fully appointed SUVs as if from nowhere. I wore Uber shades, tried the various promotions. I was thrilled, absolutely certain that they were one partnership away from Google to automate city transport and leapfrog our ailing transport grid. Then something changed. The lines between Uber and UberX blurred, and UberX drivers changed from well-dressed folks owner-operating, or working for car fleets, to guys with Jack Daniels hats, ponytails, and (this is literal) body odor. Uber decreased in quality, both in fleet and drivers. Ubers used to be spit-polished tire-black shined towncars, and the drivers were excellent. Never an open door missed, a bottle of water offered, mints stocked, radio preference, and an AC at a comfortable temperature, which the driver would immediately offers to adjust. It wasn&#x27;t just the network that made Uber. It was the service. It literally outclassed the transportation of millionaires, with service options of the Four Seasons at the price of a Motel 6. The service has now become so bad, that power users are like sailors following the rats off a sinking ship. Then it&#x27;s disclosed that one of the main showrunners has been spending all his time on some fucking branding project? And when it&#x27;s finally released, the material he produced looks like it was created by a sentient bag of cocaine. &quot;We&#x27;re particles that unite to form atoms, to something... something... interaction between meatspace and cyberspace.... unity, and particles and shit. Yo, you gonna hit that?&quot; Are you serious? In summation: No moat, no network effect. It was nice of you to pave the way for self-driving car fleets, but unless you reorganize management from the bottom of the floor up, your balloon&#x27;s about to deflate faster than Napster. Peace guys. *Full disclaimer: I did turn down a second round interview at Uber due to their policies regarding the Americans with Disabilities Act. My consulting rate is $500&#x2F;hr, and I&#x27;d consider fixing this mess with the ADA for half that. I wish I had the opportunity to speak to your board for five minutes about the damage their ADA policies are causing. Imagine a girl, unable to move unassisted, alone in the snow, as her driver throws her wheelchair to the curb screaming at how he doesn&#x27;t accept people &quot;like her.&quot;